COVER STORY (Spotlight Weekly)

Will It Be Different?

Finance Minister Acharya will be presenting his sixth budget within a decade in a fortnight. Will he be able to prescribe strong measures to put the economy on a path of sustainable growthóand implement it?

By BHAGIRATH YOGI

All eyes are set on Finance Minister Mahesh Acharya as he is leading a core team of officials from within his ministry and National Planning Commission (NPC) to formulate the budget for fiscal year 2000/01. Though presenting annual budget estimates at the Parliament is a regular phenomenon for every Minister Acharya is keen in outlining his priorities. "The forthcoming budget will accord top priority to raising economic growth, reform macro-economy to accelerate the pace of development, alleviate poverty and maintain law and order," said Acharya addressing a program organized by Morang Tradersí Association in Biratnagar on Saturday. " It will be revenue and result-oriented and it will strengthen sources of revenue mobilization and make strategies of privatization broader and efficacious. The budget will make efforts to attract foreign direct investment and make the private sector and economic liberalization more effective," he added.

While presenting Rs 77.77 billion budget estimates in the Parliament on July 11 last year, Acharya had made similar promises. Few would disagree with the problems he identified in Nepali economy and development endeavors. "The problem of poverty, unemployment and social inequality is compounding in the country," said Acharya. "It is a matter of great concern and challenge for us that even after nine years of restoration of democracy there remains such a situation in the country."

In a bid to carry out targeted programs to alleviate widespread poverty, the Minister proposed programs like "Bisweswor with the Poor" named after late Nepali Congress leader B. P. Koirala. Under the ëBisweswor with the Poorí program, 100 poorest of the poor families in each constituency will be identified and a loan of up to Rs 30,000 will be made available to them at an interest of 5 percent per annum in order to raise their income and make them available education and health services in an integrated way," said Acharya. "A total of 200,000 poor families will come out of the vicious circle of poverty in the next five years through this program," he added.

After nearly one year, no statistics is available to see how much of the targeted families really benefited out of such programs. Critics even allege that such programs were introduced only to gain cheap popularity. "The government should immediately stop such programs that aim to recruit the ruling party cadres," said Bharat Mohan Adhikary, former Finance Minister and a UML leader, last week.

Besides disagreements over politically motivated programs, there is little room for disagreement over the fundaments of economy, say experts. Management Association of Nepal (MAN), in a report submitted to the Finance Minister early this week, said the forthcoming budget should give high priority to promoting agriculture sector, increasing investment in social and infrastructure sector and preparing environment conducive for foreign and domestic investment. The budget should pay high attention for revenue mobilization to increase investments in the crucial sectors of Nepali economy. The government should bring a special program to alleviate poverty and should focus on good governance and human resource development in order to attack at widespread poverty.

Upon assuming power two months back, Prime Minister Girija Prasad Koirala said his government would give top priority to three sectors: Maintaining Law and Order, Controlling Corruption and Civil Service Reforms. "All these priorities are in line with the programs of second phase of economic reforms and will be reflected in the budget," said Dr. Shankar Sharma, member of NPC. "We have seen that in the first four years of Nepali Congress government (1991-94), the performance of the economy was quite encouraging but during the coalition era (1994-99), political instability gave birth to several ills including corruption. Hence, the government is re-focusing and re-prioritizing its efforts with a view to attain high and sustainable economic growth over a long period of time."

Prior to attaining such growth, maintaining law and order in the country has become an urgent task. With the violent Maoist rebellion expanding its reach, the government has already decided to set up an ëArmed Police Forceí to check insurgent activities within the country. The strength of the paramilitary force could be up to 25,000. Similarly, the government has also decided to deploy Royal Nepalese Army in Kalikot, Jajarkot and Salyan districts within mid-July this year and in Sindhuli and Achham districts within the next fiscal year. All these districts are known as highly affected areas from Maoist activities.

All this will cost money. Security expenses in the forthcoming budget are likely to skyrocket, said experts. A report submitted at the Home Ministry a few weeks back had estimated the cost of Rs 1.40 billion to maintain a 15,000 strong para-military force per annum. "This means that scarce resources that could be used into development works will be diverted to maintaining security," said Dr. Parthibeswor P. Timilsina, professor of Economics at the Tribhuvan University.

The government has already initiated steps to reform the civil service by reducing the number of ministries from 26 to 21. It seems the Finance Minister is also considering raising pay packet of the civil servants this year, which has become urgent to boost their sagging morale. (It will also result into hike in salary and benefits to Police, Army and teachers in government-supported Schools and Universities.) In order to check corruption, the government needs to exhibit commitment rather than the rhetoric.

As the economy is expected to grow by nearly 6 percent this year, Minister Acharyaís main concern has been to sustain this growth over a long period of time by kickstarting second phase of economic reforms. "The government strongly feels that the reform process should focus on materializing the scope of a sound state for sustained growth and tangible progress in poverty reduction," said the Minister addressing the Nepal Development Forum meeting in Paris last month. "Taking stock of the lessons of the past and building on previous efforts, the government is in its way to redesign and implement a comprehensive, yet coherent strategy for poverty reduction."

In a country where 80 percent of the people live on agriculture, the most important vehicle to reduce poverty would be to modernize the agriculture sector. Every government in the past talk of according top priority to this sector but while formulating budget they fail to back up their commitment with adequate resources. For example, the Agriculture Perspective Plan (APP) has envisaged an investment of Rs 1.22 billion to develop agricultural roadsóthe vital links to connect rural areas with the marketsóthis year. But the government allocated only Rs 150 million in this yearís budget. "Out of that only Rs 15 million has been released so far," said Dr. Champak Pokhrel, an APP Consultant with the NPC. The delay was primarily due to delay in timely release of Second Agriculture Program Loan from the Asian Development Bank. For the year 2000/01, the APP has envisaged an investment of Rs 1.55 billion to construct agricultural roads. Will the budget be able to mobilize such huge resources to a single sector? Perhaps not.

According to Dr. Pokhrel, the government should allocate funds for such critical areas through assured funds. For example, transferring the budget from programs under Department of Roads and Ministry of Local Development could solve the problem to some extent. "The budget must give prominence to the areas that have been accorded priority by the government."

As nearly one-third of the general expenditure has to be spent for debt servicing, Nepal has been depending upon donor community to finance as high as two-thirds of the total development expenditure. But donors generally are reluctant to support those projects in which the government canít provide matching funds. This means that mobilizing internal resources is one of the very crucial areas for any government.

"Value Added Tax will be the backbone of revenue collection in the next fiscal year," said Minister Acharya. "The tax will be expanded up to the retailers level and those who donít comply will be dealt with strongly." Added Dr. Rup Khadka, an expert with VAT project, "As import duties have been drastically reduced over the last few years and majority of the property tax and registration duty goes to local bodies, VAT is the only reliable form of taxation that doesnít have negative impact upon our economy."

The business community is apprehensive. "This may be good in idea but in a country where there are thousands of small traders, it doesnít look feasible," said Mahesh Kumar Agrawal, former President of Nepal Chamber of Commerce. "There is a need to simplify the tax administration, make it hassle free and implement the rules in a clear cut way." Moreover, growing unauthorized trade between Nepal and Tibetan autonomous region of China and Nepal and India needs to be controlled said entrepreneurs. "This is having very adverse impact on genuine industries here and the government is also being cheated of its revenue," said Pradip Kumar Shrestha, President of the Federation of Nepalese Chambers of Commerce and Industry (FNCCI) (See: Box)

The implementation aspect of the budget is equally poor, say critics. Nearly half of the propositions made by the Finance Minister in this yearís budget have not been implemented at all, say reports. "It is because this yearís budget has incorporated populist programs without any homework," said Dr. Raghav Dhoj Panta, former acting Vice Chairman of NPC. "At a time when government expenditure is skyrocketing (it has gone up by more than 90 percent in the first eight months of current fiscal year) and revenue collection is below the target, the government has no other alternative to foreign aid. As the volume of aid goes up, our independence in formulating and implementing our own pollicies declines."

Out of nearly Rs 78 billion budget estimates for the current fiscal year (1999/00), Rs 35.38 billion had been allocated for regular expenditure and Rs 41.85 billion for development expenditure. Minister Acharya had proposed to finance the budget through revenue (Rs 44.5 billion) and through foreign grants (Rs 8.65 billion). He proposed to finance more than Rs 24 billion deficit through domestic borrowing (Rs 5.5 billion) and the rest through foreign loans (Rs 18.5 billion).

The budget had allocated nearly 33 percent more resources for development expenditure and regular expenditure had gone up by about 12 percent. Besides reinforcing its commitment toward policies of liberalization and privatization, the budget expressed commitment toward prudent use of resources and timely monitoring and evaluation of development programs. For the first time, the Finance Minister published a booklet outlining the objectives and progress made by all the Ministries in the previous year.

The private sector, on its part, has asked the government to bring such policies in the forthcoming budget that will make industrial sector competitive and check illegal trade. In a report submitted to the Finance Minister Mahesh Acharya last week, the apex private sector body has demanded that the government bring separate policies for agriculture, tourism, services sector, information technology and promotion of the exports. "The government should take the private sector as partner in development endeavor and take initiatives to lessen the burden of high cost economy," said Pradip Shrestha, President of the FNCCI.

Experts, too, insist that the government should pay due attention in creating investment climate in the country in the forthcoming budget. "The budget should emphasize in crating good investment climate so that investors come into the productive sector," said Prof. Timilsina. "There is a need of pro-poor policies with clear-cut structure for delivery. It seems both the government and donor agencies are absent in the insurgency affected areas. To such areas, the government should take development packages along with security measures. The most important thing is, there is lack of consistency and continuity in the governmentís policies."

Unless there is consistency and continuity, the government wonít be able to gain credibility. In such a state of affairs, announcing a new budget will end up as merely a ritual. The choice is obvious: whether to take bold steps to transform Nepali economy from a traditional, agrarian structure into a thriving new economy or be content with maintaining status quo. Minister Acharya is known for making choices. Whether he will be able to learn from the past and implement his words into action remains to be seen.

‘The Budget Should Focus On Overall Economic Growth’

— PRADIP KUMAR SHRESTHA

President of the Federation of Nepalese Chambers of Commerce and Industry (FNCCI), Pradip Kumar Shrestha, is a dynamic, young leader of Nepali private sector. A strong believer in public-private partnership, he spoke to SPOTLIGHT on a range of issues related to national economy and forthcoming budget. Excerpts:

What are the main concerns raised by FNCCI in its report presented to the Finance Minister last week?

The national task force that was formed under the leadership of the FNCCI President itself is a reflection of the pro-active role of the private sector. Otherwise, the private sector used to react only after the budget was presented. Our main focus has been how economy can be expanded, business activities can grow and more organized sector could come in. The emergence of illegal trade has threatened genuine trade and the government too is losing revenue. We have also focused on how the local industries can be made competitive, how procedural hassles could be removed, how more revenue could new employment could be generated. In order to increase our exports, we have to give some incentives to our entrepreneurs.

Have you identified some new ares where the government should focus on?

Information technology could be very high employment generating industry for Nepal. We have told the government that it should lease out idle lands to private sector to promote cash crops like tea, coffee or high value agricultural products. We can also develop hill stations as education and health centers in our hills by developing infrastructure. We can see Thailand which earns millions of dollars by offering health and entertainment services. We can also promote MICE tourism.

How would you respond to Finance Minister's statement that he will impose VAT up to the retailers' level?

If the government could implement VAT well, it could a solution in the long run.It could be made a major source of revenue collection in the tax system. But because of a lot of anomalies and discretionary power with the tax officers, it has been misutilized. So, the government should take initiative to gain the confidence of the business community. VAT can't be dealt in isolation. It should be looked into a comprehensive way together with income tax and customs duty. We hope the new Income Tax will incorporate most of the suggestions given by us. Regarding VAT, we have said it is not feasible to impose VAT in some districts and at the retailers' level. We are in favor of a very transparent system that is implementable.

What has been your response to the special additional duty (SAD) imposed by the Indian government on imports from Nepal recently?

The new trade treaty that was signed in 1996 at the initiative of FNCCI and CII has really improved trade and investment situation in Nepal and India. It has been a win-win situation for both the countries. The imposition of SAD by the Indian government has affected local industries here. After this new tax, we led a number of delegations to India and met concerned authorities through our counterpart, CII. It is totally against the spirit of the treaty that was signed. So, the problem should be resolved in a very positive manner so that both the countries can grow together.

How do you see the recently formed high level investment promotion committee and security aspects for the investment in Nepal?

We have not been informed officially about this committee. Having learnt about the composition of the committee from the papers, it is unfortunate that private sector is not included there. Anyway, it's a very good thing. Regarding the security aspect, no investor would come to invest here until he feels secure. As a peace-loving country, we should find some way out to reduce costs in security through dialogue and, at the same time, life and property of the people must be protected.

How will it be possible to attain higher growth rate over a sustainable period of time?

Now we have an experienced Finance Minister and the government is stable. So, if we want to achieve a high and steady growth what we need to have is a vision followed by strategy. Economic agenda has to be given top priority. The industries that are really been suffering should be revived. We are passing through a very difficult phase. So, through industrialization, encouraging authorized trade, strong action against corruption, stability in the policies and good implementation we can achieve such a growth. What the government says should be done. This is a stable government. Instead of pleasing some individual or community it should focus on overall economic grwoth threw national consensus in priority areas.